Tax avoidance and tax evasion: are you crossing the fine line?

Tax avoidance and tax evasion: are you crossing the fine line?

Since the end the First World War, offshore financial centres such as Jersey, Guernsey, Switzerland, Liechtenstein, the Bahamas and the British Virgin Islands have been at the forefront of huge growth in offshore tax planning by both wealthy individuals and international companies.

According to Jason Porter, director of specialist expatriate tax planning firm Blevins Franks and co-author of the book Retiring to Europe, perhaps the two most important developments in the field have been the computerisation of the banking and finance industry, and the communications revolution. Innovation in these two areas has enabled legal and tax professions to market a raft of offshore template tax solutions to the ‘mass wealthy’ across the world.

The recent ‘Paradise Papers’ revelations, concerning celebrities’ offshore ploys to minimise the tax they pay, have highlighted just how effectively those ‘solutions’ can reduce tax for the people and businesses in a position to take full advantage of them. However, the revelations also raise a general and thorny question for taxpayers about what constitutes tax avoidance and when it tips over into tax evasion.

Legal question

‘Essentially, the difference between tax avoidance and tax evasion is legality,’ says Porter. ‘Tax avoidance is legally exploiting the tax system to reduce your current or future tax liabilities. Tax evasion is using illegal means to the same end.’

Perhaps one of the main reasons there is now such a large and problematic grey area between the two routes to reducing tax liabilities is that similar tax structures, in jurisdictions that may also be very alike, are enforced with varying degrees of aggression to end up in different finishing positions on the avoidance-evasion scale.

As an example, Porter cites UK-resident but non-domiciled individuals who over the years have regularly used offshore trust and company structures legitimately to reduce their exposure to UK income tax, capital gains tax and inheritance tax. Yet the same structures also provide a significant degree of confidentiality to those seeking to disguise true ownership of an asset.

So what should UK citizens be doing, if they are worried about their offshore tax affairs and keen not to be caught out by the system?

Requirement to correct

First, be clear that there is nothing inherently questionable about offshore investments. Placing your money offshore is perfectly legal as long as you are not using your offshore bank account to conceal money from the tax authorities, the police or creditors.

Similarly, an investment fund you own may be based offshore, but as long as you declare income and gains from it on your tax return, that is not a problem.

You may be able to sidestep the need to declare your profits if you hold the fund in an Isa or a Sipp. Offshore funds authorised by the Financial Conduct Authority will qualify for Isa eligibility. Offshore funds can be held in a Sipp wrapper, but not all Sipp providers will accept them, so you’ll need to check with your provider.

However, if you have undeclared offshore assets, you should come forward and settle up without delay, as reporting standards are tightening. ‘Until now, HM Revenue and Customs has struggled to obtain information from offshore tax havens,’ says Mike Down, head of tax investigations at accountancy firm RSM.

‘But as transparent “common reporting standard” information starts to flow more freely between 100 jurisdictions worldwide, HMRC will begin to secure valuable evidence enabling it to robustly challenge those it believes are sidestepping their UK tax obligations.

‘Under the new “requirement to correct” (RTC) legislation, those with additional income tax, capital gains tax or inheritance tax to pay [on offshore holdings] have until 30 September 2018 to ensure their offshore tax position is fully compliant in the UK.’

The RTC is unlike HMRC’s previous disclosure facilities, in that no special terms are available to those coming forward. Tax-based monetary penalties apply in accordance with the current offshore penalty regime, and there is no guarantee of immunity from criminal investigation.

Sanctions threat

Those who don’t make a disclosure during the RTC period will risk significantly greater sanctions. As well as the threat of criminal investigation, they could face ‘failure to correct’ (FTC) penalties of up to 200 per cent of the underdeclared liability. Further asset based penalties of up to 10 per cent of the value of relevant offshore assets, and public naming and shaming, could also come their way.

Most situations will, of course, fall short of serious tax evasion, so once a tax shortfall has been identified, HMRC anticipates that taxpayers will register to use its online worldwide disclosure facility, which provides a relatively simple way to self-assess past offshore tax errors and settle up quickly.

‘Offshore tax issues range from something as simple as undeclared rents or bank interest to more complex foreign structures,’ says Down.

‘Given the potential FTC sanctions, taxpayers need to carefully review their offshore financial affairs prior to the expiry of the RTC window and, where necessary, seek specialist professional advice.’ 

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